Financial Accounting for Managers

ASIAN PAINTS

Submitted to Dr. Pawan Jain

Submitted by Shafique Gajdhar Shreya Khandelwal 2012289 (E) 2012297(E)

1

Table of Contents
Company Profile Computed Ratios Analysis of Ratios Financial Health of the Company Analysis of Cash Flow Statements Significant Accounting Policies Followed in Compilation Of Accounts Major Expense Heads Main Revenue Generating Activity Growth Drivers MDA Conclusion Reference 3 5 6 10 10 11 13 13 14 14 15 15

COMPANY PROFILE: Asian Paints is Indias largest paint company and Asias third largest paint company, with a turnover of Rs 77.06 billion. The group has an enviable reputation in the corporate world for professionalism, fast track growth, and building shareholder equity. Asian Paints operates in 17 countries and has 24 paint manufacturing facilities in the world servicing consumers in over 65 countries. Besides Asian Paints, the group operates around the world through its subsidiaries Berger International Limited, Apco Coatings,SCIB Paints and Taubmans. Forbes Global magazine USA ranked Asian Paints among the 200 Best Small Companies in the World for 2002 and 2003 and presented the 'Best under a Billion' award, to the company. Asian Paints is the only paint company in the world to receive this recognition. Forbes has also ranked Asian Paints among the Best under a Billion companies in Asia In 2005, 06 and 07. The company has come a long way since its small beginnings in 1942. Four friends who were willing to take on the world's biggest, most famous paint companies operating in India at that time set it up as a partnership firm. Driven by its strong consumer-focus and innovative spirit, the company has been the market leader in paints since 1968. Today it is double the size of any other paint company in India. Asian Paints manufactures a wide range of paints for Decorative and Industrial use. Today the Asian Paints group operates in 17 countries across the world. It has manufacturing facilities in each of these countries and is the largest paint company in eleven countries. The group operates in five regions across the world viz. South Asia,South East Asia, South Pacific, Middle East and Caribbean region through the five corporate brands viz. Asian Paints, Berger International, SCIB Paints, Apco Coatings and Taubmans.

The company has a dedicated Group R&D Centre in India and has been one of the pioneering companies in India for effectively harnessing Information Technology solutions to maximize efficiency in operations.

COMPUTED RATIOS: ASIAN PAINTS Ratios A} Return on Investment Ratio 1 Return on Asset 2 Return on Invested Capital 3 Return on Net Worth 2007-08 2008-09 2009-10 2010-11

96.8 57.32 40.4

114.1 49.35 33.1

162.35 62.94 49.73

205.93 55.73 39.24

B} Activity/ Turnover Ratio 4 Working capital turnover ratios 5 Inventory Turnover Ratio 6 Total Asset Turnover Ratio C} Liquidity Ratios 7 Current Ratio 8 Quick Ratio 9 Acid Test Ratio D} Solvency Ratios 10 Debt-Equity Ratio 11 Interest Coverage Ratio E} Capital Market Ratios 12 Dividend Payout Ratio 13 Earning Per Share F} Profitability Ratio 14 Net Profit Ratio 15 Operating profit ratio

3,466.10 3,519.10 3,720.60 6,022.10 8.03 9.8 7.95 7.08 3.7 4.02 3.4 3.33

1.10 0.17 0.64

1.28 0.24 0.88

0.92 0.15 0.5

0.99 0.28 0.46

0.10 69.26

0.07 54.25

0.04 79.43

0.03 74.15

50.84 39.12

54.19 37.78

39.03 80.74

46.06 80.81

9.7 15.12

7.67 13.26

15.11 20.59

12.26 18.82

ANALYSIS OF RATIOS: 1. Return on Assets: This ratio indicates how profitable a company is relative to its total assets. The ROA for the company has increased tremendously in the given time period which shows that management has been successful in deploying assets to derive profits. 2. Return on Invested Capital: It is an important measure of a company's profitability. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. The ROIC for Asian Paints has fluctuated in the four years but remained the same for the period. 3. Return on Net Worth: The shareholders equity. Return on by revealing how much profit invested. For Asian Paints the 2007-08 in the year 2010-11. amount of net income returned as a percentage of equity (Net Worth) measures a corporation's profitability a company generates with the money shareholders have RONW was highest in 2009-10 but reduced to same as

4. Working Capital & Turnover Ratio: A measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales. There has been a significant increase in WCTR from 2007-08 to 2010-11 in Asian Paints. 5. Inventory Turnover Ratio: This ratio shows how many times a company's inventory is sold and replaced over a period. There is a constant figure emerging for all the financial years which is good but higher ITR is undesirable as products should be made and sold constantly in the market.

6. Total Asset Turnover Ratio: The amount of sales generated for every rupees worth of assets. It is calculated by dividing sales by assets. The ratio for Asian paints has been varying slightly.

7. Current Ratio: It is a widely used indicator of a companys ability to pay its debt in the short-term and shows the amount of current assets a company has per rupee of current liabilities. A current ratio of one indicates that the company will be able to pay off its current liabilities. The current ratio for Asian Paints has increased and then decreased showing that its ability to pay debt has reduced considerably. 8. Quick Ratio: Quick ratio only considers those current assets which can be quickly converted into cash and therefore we leave out the inventory. The quick ratio for Asian Paints is considerably on the lower side with variation in the period concerned. 9. Acid Test Ratio: A stringent indicator that determines whether a firm has enough shortterm assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets.

10. Debt Equity Ratio: It compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. For Asian Paints it has been decreasing constantly for all the four years, referring to an increase in equity and decrease in liability. 11. Interest Coverage Ratio: A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period. This has increased for Asian Paints, which is a good sign signifying companys ability to pay its debt. 12. Dividend Payout Ratio: This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment. It has decreased for the company and dividend distributed to shareholders has decreased. 13. Earnings per share (EPS): EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders. EPS has increased incredibly in the last financial year showing the good performance of the company in share market.

14. Net Profit Ratio: A ratio of profitability calculated as net profits divided by sales. It measures how much out of every rupee of sales a company actually keeps in earnings. 15. Net operating Profit: It is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating profit is required for a company to be able to pay for its fixed costs, such as interest on debt. Its moderate for Asian Paints and on the constant lines throughout the four years.

FINANCIAL HEALTH OF THE COMPANY: Shareholders: The increase in dividend reflects increasing return for the shareholders. The EPS has tremendously increased in the 4 year period it gives a positive sign to all the shareholders that in the long term it is going to increase and thus they should retain their money in the shares. For a potential shareholder the company is a very good prospect. Lenders: The balance sheet of the company illustrates that the debt component has decreased in the four year period. There is an increase in interest coverage ratio which shows that the company has potential to pay the interest obligations. The operating profit of the company has increased in the 4 year period. There has been a significant increase in fixed assets from 2007-08 to 2010-11 strengthening the companys ability to repay its debt even in the time of exigencies. Manager: The assets are efficiently utilized to generate revenue and the total operating profit is constantly increasing. The assets of the company have increased dramatically in the four years. Overall the company is in good financial health.

CASH FLOW ANALYSIS: The major portion of cash in flow to the company in the 4 years (2007-08 till 2010-11) has been from the Operating activities. This indicates the good health of the company in its operations. There is no net inflow of cash for the company from investing and financing activities in these 4 years. There have been fluctuations in the cash flow from the operating activities, showing a very high inflow in 2009-2010 due to increase in cash inflow from other non-cash items and less cash outflow from inventory. The company has consistently been buying more than selling investments which generated net cash outflows in these four years. The company has consistently been acquiring new assets which indicate that the company is in expansion mode. There has been decrease in net acquisition from 2008 to 2009 and then an increase from 2009-2010. Purchase of investments decreased till 2009 and then increased continuously. Sales and Maturities of investments is decreasing from 2008-2009 till 2010-2011. Due to the effect of all these changes, the net cash outflow for investing activities decreased from 2007-2008 to 2008-2009 and then it is continuously increasing. The company also has only net outflow from financing activities over these years which indicates that the company is self-sufficient and it has been repaying its old loans which is why the company has net outflow of cash from financing activities. The amount paid as dividends in increasing each year and there is general trend of increase in cash outflow from financing activities with a little deviation observed in 2010-2011. The analysis of cash flow statements for the last 4 years indicate that the cash generated from its operating activities are sufficient to cater to its investing and financing activities.

10

SIGNIFICANT ACCOUNTING POLICIES FOLLOWED IN COMPILATION OF ACCOUNTS: 1. Basis of preparation of financial statement: (a) Basis of Accounting: The financial statements have been prepared and presented under the historical cost convention on accrual basis of accounting to comply with the accounting standards prescribed in the Companies (Accounting Standards) Rules, 2006 and with the relevant provisions of the Companies Act, 1956. (b) Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in India . 2. Fixed assets Fixed assets are carried at the cost of acquisition or construction, less accumulated depreciation. Depreciation on all fixed assets is provided under Straight Line Method. The rates of depreciation prescribed in schedule XIV to the Companies Act, 1956 are considered as the minimum rates.Depreciation on following assets has been provided at rates which are higher than the corresponding rates prescribed in Schedule XIV. Information Technology Assets: 4 years Scientific Research equipment: 8 years Furniture and Fixtures: 8 years Office equipment and Vehicles: 5 years 3. Revenue recognition: Revenue from service is recognized on rendering of services to customers. Dividend income is recognized when the right to receive payment is established. Interest income is recognized on the time proportion basis. 4. Lease accounting: Lease rentals are accounted on accrual basis in accordance with the respective lease agreements. 5. Inventory: In determining cost of raw materials, packing materials, traded items, stores, spares and consumables, weighted average cost method is used. 6. Investments: Profit and loss on sale of investments is determined on a first-in-first-out (FIFO) basis. 7. Transactions in Foreign exchange:
11

Transactions in foreign currency are recorded at the exchange rate prevailing on the date of the transaction 8. Sundry debtors: Sundry debtors are stated after writing off debts considered as bad. 9. Employee Benefits: A. Short Term Employee Benefits: All employee benefits payable wholly within twelve months of rendering the service are classified as short term employee benefits and they are recognised in the period in which the employee renders the related service. B. Post-employment benefits: (a) Defined contribution plans (b) Defined benefit plans (i) Defined benefit gratuity plan (ii) Defined benefit pension plan (iii) Defined Post-Retirement Medical benefit plan C. Other long term employee benefits: Entitlements to annual leave and sick leave are recognised when they accrue to employees. The Company determines the liability for accumulated leaves using the Projected Accrued Benefit method with actuarial valuations being carried out at each Balance Sheet date. 10. Research and development: Capital expenditure is shown separately under respective heads of fixed assets and Revenue expenses including depreciation are charged to Profit and Loss account. 11. Provision for taxation: Tax expense comprises of current tax, deferred tax charge or credit and fringe benefit tax (computed in accordance with the relevant provisions of the Income Tax Act, 1961). 12. Provisions and contingencies: The Company creates a provision when there exists a present obligation as a result of a past event that probably requires an outflow of resources and a reliable estimate can be made of the amount of the obligation. 13. Earnings Per Share: The Basic and Diluted Earnings Per Share (EPS) is computed by dividing the net profit after tax for the year by weighted average number of equity shares outstanding during the year. 14. Proposed dividend: Dividend recommended by the Board of directors is provided for in the accounts, pending approval at the Annual General Meeting.
12

MAJOR EXPENSE HEADS: 20072008 1956.13 151.6 164.85 158.96 20082009 2606.93 173.94 197.05 199.83 20092010 2840.24 213.93 244.25 234.37 20102011 3646.87 269.22 282.35 291.82

Expenses Material Cost Freight & handling charges Advertising & Sales promotional expenses Cash & Payment performance discount

MAIN REVENUE GENERATING ACTIVITY: Most of the revenues are generated by selling paints and varnishes. As most of the sales are by tangible goods, it is easier for the company to recognize its revenues and for the audit or to verify them. The company has little scope to play with the accounts as it has to recognize the revenues generated from total sales of its goods. A major part of Asian paints revenues are generated by sales of paints. Asian paints also have revenues generated from services which form a very small part of its total revenue. GROWTH DRIVERS: It is the market leader in decorative paints in India and operates in all segments of interior & exterior wall finishes, enamels and wood finishes. In industrial paints segment, Asian Paints directly operates in auto refinish, protective coatings, floor coatings and road marking paints segments. In decorative paints business, the company intends to secure growth by spreading its distribution network, installation of more colour world machines and innovative retailing
13

initiatives. The company is also looking at a more consumer centric approach with focus on R&D to provide new or upgraded products, providing shopping ambience and a more effective complaint redressal mechanism. The company's move to make its entire range of decorative products free of lead and other heavy metals is a step in this direction. The demand in tier II and III towns is buoyant and likely to be a good growth driver for the company. Asian Paints also has an eye on capacity building both in India and overseas and is incurring capital expenditure towards expanding its manufacturing capacities. MANAGEMENT DISCUSSION AND ANALYSIS: 1. Sharp increase in raw material prices was one of the key concerns identified by your Company for FY 2010-11 and as expected, it posed significant challenges throughout the year. 2. Increased raw material costs combined with resistance from customers to accept the steep increase in prices exerted pressure on margins through the year. 3. The availability of power supply is a matter of concern. Company is forced to rely on self-generated power in many locations, which is not cost effective. 4. The International markets where company operates in, continued to be impacted by the economic slow-down, although the South Asian countries were relatively less impacted 5. Political turmoil in Egypt and Bahrain has impacted business conditions in these countries in the last quarter of the year. 6. Material prices during the year were volatile and saw an inflationary trend due to shortages in critical raw materials and rising prices of crude oil.(for international markets) 7. Competition amongst the coatings suppliers is also giving leveraging power in the hands of the customer forcing prices down. 8. Plant shut downs during the year owing to a planned catalyst change operation, some unanticipated stoppages in plant operations lead to production of Phthalic Anhydride being lower than last year. 9. Widespread shortage of crucial raw materials is foreseen as the demand for materials is picking up with revival of economies of several countries. CONCLUSION: The study evidently reveals that Asian Paints is in good financial health, the numbers in the financial report strengthens the view. The consistency of figures during the global turmoil of 2008 and thereafter reviving the growth in figures, Asian Paints has proved to be a robust company. The future prospects for the company are bright. REFERENCES: www.asianpaints.com www.investopedia.com http://economictimes.indiatimes.com/asian-paints-ltd/stocks/companyid-14034.cms
14

15